}

Tuesday, October 31, 2017

GROUND BROKEN: Noss Attorney Makes Appearance In Grand Traverse County's Circuit Court


Jay Zelenock, the attorney representing Mark Noss; Full Spectrum Management, LLC and MDN Development, LLC in the breach of contract suit filed October 25, 2017 by Comstock Construction, made an appearance in court this morning.

Further details to come.


Monday, October 30, 2017

“BREACH OF CONTRACT”, “UNJUST ENRICHMENT”: The Comstock Construction Complaint!

“GT Academy was unable to secure financing for the project on its own due to instances of financial malfeasance by a prior administrator.”

“MDN did not have any assets and was undercapitalized, failed to follow corporate formalities, and acted as an alter ego for Noss.”

Comstock Construction Company v. Grand Traverse Academy; Full Spectrum Management, LLC; 
MDN Development, LLC; 
and Mark Noss, jointly and severally.

October 25, 2017

Exclusively from this blog, the definitive examination of the civil complaint filed October 25, 2017 by Comstock Construction in Grand Traverse County's 13th Circuit Court. 

The 29-page document, including the agreement signed between Mark Noss and Comstock, makes damning allegations, which are detailed below.
Beginning on or about June 2015, the Grand Traverse Academy desired to build an expansion to its school. 

The Grand Traverse Academy was unable to secure financing for the project on its own “due to instances of financial malfeasance by a prior administrator.” 

It was decided between the Grand Traverse Academy and Full Spectrum and/or Noss, that a new company, MDN, would be formed to seek financing on the Grand Traverse Academy’s behalf and for “GT’s benefit in order to build the expansion to the School.” 

On July 13, 2016, Comstock entered into a contract with MDN for the design and construction of an addition to the Grand Traverse Academy. 

In its complaint, Comstock alleges “MDN did not have any assets and was undercapitalized, failed to follow corporate formalities, and acted as an alter ego for Noss.” 

An explanation of the “failure to follow corporate formalities” and “alter ego” allegations is required. 
An LLC, like MDN Development and Full Spectrum Management, is a hybrid business structure that gives the owners, known as members, significant leeway to manage the business informally as they see fit. 

However, throwing all formalities to the wind can have serious consequences for the business. Comparatively, state laws governing corporations list many specific formalities that the shareholders and directors must follow, such as holding annual shareholders meetings and keeping minutes of board meetings on file so shareholders can periodically inspect the corporate records. 

Although not keeping minutes of a particular meeting or observing other regular formalities won't result in immediate consequences, the company must operate in a way that satisfies record-keeping requirements of state and federal government agencies concerning the ownership, organization and finances of the business. 

One of the most serious consequences of failing to follow business formalities can be a ruling by a court that your LLC doesn't really exist as a separate entity apart from its members. 

In certain cases, using the legal doctrine of "piercing the corporate veil," creditors can sue to hold the LLC members personally liable for business actions and debts. 

Following business formalities, such as documenting major decisions and maintaining a separate business bank account, establishes the company's legal independence and preserves the members' limited liability for business affairs. 

What is an “alter ego” theory? 

As with a corporation, it may be possible to pierce the veil of an LLC or LP. What this means is that if Noss (as a manager or member of an LLC) or his company engage in an act of negligence, gross negligence, or breach of contract, under certain circumstances a judge can set aside the company’s limited liability veil. 

In other words, the LLC members could be held personally liable for company debts. 
Continuing, Comstock stated it “provided the specified design and construction services set forth” in its agreement with Mark Noss/MDN Development. 

In addition, Comstock alleges all “Defendants reviewed and approved the specified design and construction services completed by Comstock”. 

Full Spectrum Management, on behalf of MDN at the Grand Traverse Academy paid “Comstock the initial $50,000 deposit and payment due under the Agreement”. 

In the months after Noss’s approval of the July 13, 2016 agreement, “Comstock presented MDN with invoices for services rendered. At all times during the pendency of the above actions, MDN, Full Spectrum, and Noss acted as an agent of GT Academy and for the benefit of GT Academy”. 

To date, there remains “more than $214,861.00 in unpaid costs under the Agreement”. 

Comstock has “made repeated attempts to elicit payments of those costs from MDN, Noss and the GT Academy, but Defendants have been unwilling to comply”. 

According to the agreement Mark Noss signed with Comstock Construction, the “Guaranteed Maximum” price was $3,222,068.00.

BACKSTORY 

Mark Noss, then head of the Grand Traverse Academy's management company, Full Spectrum Management, LLC, formed MDN Development, LLC, his private, affiliated property development company, on June 18, 2015. 

Noss, who has never revealed his MDN Development business partners or investors, wasted little time locking down an “Exclusive Easement Agreement” with the Grand Traverse Academy to construct a 29,000 square foot building on Academy-owned property and lease it back to the charter school — inking the easement agreement on June 26, 2015, just eight days after forming MDN Development. 

Nearly eight months later, during a February 2, 2016 special board meeting, the Grand Traverse Academy board voted 4-0 to approve a “lease resolution” that acknowledged the Academy “explored and failed to secure various direct construction financing options” and has “received an offer to lease newly constructed facilities from MDN, LLC”. 

Although the lease resolution noted the seven-page lease was “subject to final legal/accounting review”, it was signed during the meeting by board treasurer Samer Bourdkani. 

It is unclear whether the board conducted a legal review of the lease before it was signed. 

Although it’s now moot, the 20-year term of the contract, and the financial obligation it would have imposed on the Academy, appeared excessive when considering that the use of the facility was to house a charter school whose budget is derived largely, if not entirely, from public funds. 

In addition to the above-market monthly lease rate ($30,000 per month, then levitating like a séance table to $38,000 monthly by the contract's second year), the lease contained a Purchase Option clause, with a price tag that delivered quite a punch. 

The “lessee (the Grand Traverse Academy) may exercise an option to purchase the building, fixtures and premises from the lessor on February 1, 2019 for a sum of Three Million Nine Hundred Thousand Dollars ($3,900,000).” 

The approved lease contract also stated that the two parties “agree that the 2019 purchase price represents an arm’s length transaction which reasonably balances the purchase price with the loan and associated risk to the lessor.” 

The Grand Traverse Academy would pay rent to either Full Spectrum Management, LLC or MDN Development, LLC, revenue which Mark Noss would have used to pay Comstock Construction. 

Noss, and his MDN Development partners, stood to make a seven-figure return on the construction, rental and February 1, 2019 sale of the now-scuttled Grand Traverse Academy expansion. 

If the school couldn't scrape together the money to pay the $3.9 million dollar asking price at that one-time, one-time only, February 1, 2019 date, it would have paid an estimated $8.5 million dollars in monthly payments over the lease's 20-year term. 

You read that right...an estimated $8.5 million dollars! A back-of-the-envelope calculation revealed Noss and his investors stood to make nearly $5.0 million dollars above the loan cost during the 20-year term of the lease. 


THE COUNTS 

COUNT 1: Reformation/Alter Ego (All Defendants) 

At the time of formation (of the agreement between Comstock and Mark Noss) “Comstock, MDN, Full Spectrum, Noss and GT Academy were fully aware that the Agreement was made at the direction of, for the benefit of, and under the supervision of GT Academy”. 

At the time of the contract formation (July 16, 2016) it was “understood by all parties that GT Academy, while not the party that would be able to secure financing, was nevertheless an indispensable party to and beneficiary of the Agreement.”

Comstock further alleged that by denying liability under the contract “GT Academy, Full Spectrum and/or Noss are using MDN to commit a wrong against Comstock.” 

As a result, “MDN was acting as an alter ego for GT Academy, Full Spectrum and/or Noss, and should bear full responsibility for any breach of the Agreement and/or damages suffered by Comstock”. 

Comstock alleges that “because MDN was a mere instrumentality of GT Academy, Full Spectrum and/or Noss, the Agreement at issue in this case should be reformed to properly establish GT Academy, Full Spectrum and/or Noss as a party to the Agreement, responsible for any breaches of the Agreement and sums due to Comstock”. 

COUNT 2: Breach Of Contract (All Defendants) 

In its complaint, Comstock insisted it has “fully performed under the Agreement, and is entitled to compensation” as established in the contract, and alleges “MDN, GT Academy, Full Spectrum and Noss have materially breached” the contract by refusing to pay “contractual amounts due for the completed work”. 

As a result, “Comstock has suffered damages in excess of $214,861.00 plus applicable interest, costs, and fees.”

COUNT 3: Unjust Enrichment/Quantum Meruit (All Defendants) 

Comstock “has fully performed under the Agreement, and is entitled to compensation”, although the defendants (MDN, GT Academy, Full Spectrum and/or Noss) “have refused to provide payment for work done by Comtock”. 

Reiterating its allegation from Count 1, Comstock states “MDN was a mere alter ego of GT Academy, Full Spectrum and/or Noss, and should equitably bear full responsibility for payment for work done by Comstock”. 
Comstock filed its complaint under joint and several liability, pursuing the $214,861.00 obligation against any one party as if they were jointly liable. 

It becomes the responsibility of the named defendants—MDN Development, Full Spectrum Management, the Grand Traverse Academy and Mark Noss—to sort out their respective proportions of liability and payment.